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BHP Billiton: Organic growth enabled by high prices

February 16, 2011

“An improving economic backdrop and broader supply constraints continued to support the fundamentals for the majority of BHP Billiton’s core commodities. Stronger realised prices in the December 2010 half year increased. Underlying EBIT by US$8,531 million, net of price linked costs. Industry wide operating and capital cost pressures are, however, being experienced across a range of businesses and BHP Billiton is not immune from that trend. The devaluation of the US dollar and inflationary pressures reduced Underlying EBIT by a combined US$1,415 million.

Operating cash flow of US$12,193 million resulted in the Group ending the December 2010 half year in a net cash position. This balance sheet strength affords BHP Billiton substantial flexibility as it embarks on significant investment in organic growth that is expected to exceed US$80 billion over the five years to the end of the 2015 financial year. Major projects, including those in iron ore and metallurgical coal, are at an advanced stage of the approvals process and should result in a substantial increase in sanctioned project capital expenditure.

Notwithstanding the significant commitment towards growth, BHP Billiton has declared a ten per cent increase in its interim dividend to 46 US cents per share and has announced an expanded US$10 billion capital management program. BHP Billiton will continue to consider both on and off-market execution for the US$10 billion program and, subject to market conditions, expects to largely complete the initiative by the end of the 2011 calendar year.”

Source: BHP Billiton press release, February 16 2011

Observations:

  • The impact of commodity prices on the results for this half year vs. the half year ending December 2009 were: Iron ore +$4.4bln; Base metals +$1.4bln; Metallurgical coal +$1.1bln; All other +$1.7bln.
  • Total investment pipeline for the coming 5 years is approx. $80bln (excl. exploration), half of which will be invested in the iron ore and petroleum business. Especially the budget for pre-feasibility studies (over $20bln) underlines BHP’s ambition to spur organic growth.
  • BHP expects to largely complete a $10bln additional capital management program in 2011, aiming to return a large part of the cash pile of over $16bln to shareholders.

Implications:

  • Revenues and profits have shot up due to price increases. However, just as in the case of Rio Tinto, controllable costs have increased. Extreme weather conditions only partly explain this cost increase. Of the major diversified miners publishing their results this month only Xstrata managed to reduce the controllable costs. Key focus for the large miners in the near future will be to carefully select investments and to keep costs in running operations down.
  • The capital program of $80bln over 5 years and the dividend payout of roughly $5bln a year require the company to have a positive cash flow from operations of some $10-11bln in each half year. At the rate of producing cash in the last 6 months ($12bln for the half year) the company is still building up a reserve that would enable it to make additional acquisitions.

©2011 | Wilfred Visser | thebusinessofmining.com

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